Chapter 2: Q8-15I (page 159)
Suppose you find that prices of stocks before large dividend increases show on average consistently positive abnormal returns. Is this a violation of the EMH?
The correct answer is ‘No’. It is not a violation of EMH.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
An investor takes as large a position as possible when an equilibrium price relationship is violated. This is an example of:
a. A dominance argument.
b. The mean-variance efficient frontier.
c. Arbitrage activity.
d. The capital asset pricing model.
Which one of the following would provide evidence against the semi-strong form of the efficient market theory?
a. About 50% of pension funds outperform the market in any year.
b. You cannot make abnormal profits by buying stocks after an announcement of strong earnings.
c. Trend analysis is worthless in forecasting stock prices.
d. Low P/E stocks tend to have positive abnormal returns over the long run.
To estimate the Sharpe ratio of a portfolio from a history of asset returns, we use the difference between the simple (arithmetic) average rate of return and the T-bill rate. Why not use the geometric average?
In Problems 21–23 below, assume the risk-free rate is 8% and the expected rate of return on the market is 18%.
A share of stock is now selling for \(100. It will pay a dividend of \)9 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year?
Use the following data in answering CFA Questions:
Investor “satisfaction” with portfolio increases with expected return and decreases with variance according to the “utility” formula: U = E(r) - ½ Aσ2where A = 4.
Question: Based on the formula for investor satisfaction or “utility,” which investment would you select if you were risk averse with A = 4?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
